If you don't care about how much you get out of Social Security, then by all means, sign up whenever you feel like it. But if you want the largest possible checks, you need to plan your claiming strategy carefully.
Considering the three factors listed below will help you determine the ideal age to sign up for benefits.
1. How many years you've worked
Your Social Security benefit is based on your average monthly earnings over your 35 highest-earning years, adjusted for inflation.
Working more than 35 years often increases benefits because workers typically earn more later in their careers. These higher-earning years gradually replace the lower-earning years in their benefit calculation. On the other hand, working less than 35 years can shrink Social Security checks quite a bit because zero-income years are then factored into the calculation.
If you earned $50,000 per year, adjusted for inflation, every year for 35 years, your monthly benefit would be $1,911 at your full retirement age (FRA). More on your FRA below. But if you only worked for 34 years instead of 35, your monthly benefit would now be just $1,872 at your FRA. That $39 loss may seem like a small price to pay for one year fewer in the workforce, but it adds up. Over 30 years, that $39 monthly loss would amount to $14,040.
You get to decide when to start benefits, and it's fine to start before you've worked 35 years if you're comfortable taking a loss. But if you want the largest checks, try to work for at least 35 years.
2. How your starting age affects benefits
You must wait until your full retirement age (FRA) to claim benefits if you want the full amount you're entitled to based on your work history. This is 66 for those born between 1943 and 1954. Then it rises by two months every year after that until it hits 67 for those born in 1960 or later.
You probably know you can start Social Security benefits as early as 62. But not everyone realizes that starting that soon shrinks their checks. If you sign up at 62, you'll only get 70% of your scheduled benefit per check if your FRA is 67, or 75% if your FRA is 66.
Every month you delay benefits increases your checks slightly until you hit the maximum amount at 70. That maximum is 124% of your scheduled benefit per check if your FRA is 67 or 132% if your FRA is 66.
That doesn't mean delaying benefits is always the better choice. You have to consider your life expectancy. Delaying benefits will net you more per check, but you'll get fewer of them. If you don't think you'll live long, you'll probably get more money overall by signing up right away and claiming what you can before you die.
But if you live several decades, the larger checks you'll get from delaying will eventually lead to a bigger lifetime benefit than you would've had if you had claimed early and received more (but smaller) checks.
You also need to think about your finances. Some people need Social Security to get by and cannot afford to delay benefits, even if it would pay off in the long run. In that case, all you can do is delay benefits as long as possible. Every month you wait increases your checks slightly, giving you more money for the rest of your life.
3. How it affects your tax bill
You might owe taxes on your Social Security benefits, but it depends on your provisional income and marital status. Your provisional income is defined as your adjusted gross income (AGI) — your income minus some tax deductions — plus any nontaxable interest you have and half of your Social Security benefits.
Individuals with provisional income of $25,000 or more and married couples with provisional income of $32,000 or more could owe taxes on up to 50% of their Social Security benefits. And individuals with provisional income exceeding $34,000 and married couples with provisional income exceeding $44,000 could owe taxes on up to 85% of benefits. But just because you can owe that much doesn't mean you will. The Social Security benefit tax formula is beyond the scope of this article, but here's a guide for those who want to learn more.
Some states also tax Social Security benefits, but each has its own rules. Check your state's regulations to learn what to expect. Most states that tax benefits have some sort of income threshold, like the federal government, to determine who owes tax and how much.
Keep these taxes in mind when budgeting for your retirement. If you fail to plan for them, you could end up with a surprise bill at the end of the year that forces you to withdraw more money from your savings than you'd planned.
If you don't have a plan for Social Security yet, use the above information to help you get started. You can always change your plans over time, but having something to work from can help you figure out how much you need to save for retirement.
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